The CAFC has ruled in the past that an infringer’s net profit margin is not the ceiling capping a reasonable royalty (Golight v. WalMart, 2004) and here it again finds a lower court erred by doing just that in Douglas Dynamics v. Buyers Products.
Following a jury verdict that found two patents valid and infringed, the district court in 2011 denied plaintiff Douglas Dynamics a permanent injunction and assigned an ongoing royalty to Buyers. In a post describing that opinion, we explained how the lower court applied the discredited 25% Rule to determine the ongoing royalty rate. The lower court also wrote: “the royalty should realistically leave some room for profit, either on the initial sale or on ancillary ones; otherwise it makes little sense to enter into an ongoing royalty at all. In light of all of these considerations, Douglas’s suggested royalty rates are simply too high.”
Here, the CAFC first finds that “the district court abused its discretion by applying the infamous 25% rule of thumb, which this court held in Uniloc was fundamentally flawed. [citing Uniloc] Second, the district court clearly erred by limiting the ongoing royalty rate based on [defendant’s] profit margins. This court has held that an infringer’s net profit margin is not the ceiling by which a reasonable royalty is capped. [citing Golight] The infringer’s selling price can be raised if necessary to accommodate a higher royalty rate, and indeed, requiring the infringer to do so may be the only way to adequately compensate the patentee for the use of its technology. Thus, the district court clearly erred by ensuring the ongoing royalty rate it awarded would ‘leave some room for profit’ by [defendant] at its current prices.”
This decision isn’t exactly ground-breaking regarding reasonable royalty damages. In the federal circuit’s decision in Aqua Shield v. Inter Pool Cover Team a year later (December 2014), the court covers this issue yet again and suggests that defendant’s profitability may have more impact on the reasonable royalty rate if, for example, it were unable to raise prices.
Douglas Dynamics, LLC v. Buyers Prod. Co., 717 F.3d 1336 (Fed. Cir. 2013)